Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Friday, November 16, 2012

Senators Put Hold on Office of Financial Research Director over Treasury’s Failure to Respond to LIBOR Concerns

Senators Charles Grassley (R-Iowa) and Mark Kirk (R-IL) have put a hold on
the nomination of Richard Berner to be the head of the new Dodd-Frank created Office of
Financial Research due to Treasury’s failure to respond to issues surrounding
LIBOR. The OFR is designed to assist the Financial Stability Oversight Council
by conducting studies and accumulating financial data.

Specifically, the Senators are concerned that Treasury failed to respond to
their October 2 letter to Sescribed as a rigged interest rate that affects
interest rates on mortgages, student loans, credit cards and other loans. In the
letter to the Secretary, the Senators asked Mr. Geithner to answer a series of
questions including whether the Treasury Department has calculated the
increased debt burden that U.S.
borrowers, including state, municipal, and local governments, will face as a
result of the LIBOR scandal.

The Senators also ask if U.S.
officials considered the litigation risks to U.S.
borrowers in deciding to bring the LIBOR scandal only to the attention of
British central banks rather than U.S. lenders and borrowers and
whether the Treasury Department’s continued reliance on LIBOR is affecting
borrower access to Small Business Administration loans. The Secretary’s
response to the questions was requested by October 16.

The London
interbank offered rate, or LIBOR, is the average interest rate that banks use
to borrow from each other. Set in London,
the rate is one of the main rates that determine the cost of interest for
trillions of dollars of loans on a variety of everyday consumer loans such as
mortgages and more complicated financial instruments such as derivatives.

Senators Grassley and Kirk emphasized that, in the wake of the LIBOR
scandal, it is essential to undertake steps to consider the creation of a
US-based interest rate index. If U.S.
investors and borrowers have suffered financial harm from dependence on an
index set in London,
they have the right to expect the country’s leaders to support better
alternatives. Complacency in the wake of losses and lawsuits will diminish both
investor and borrower confidence regarding debt securities issued in U.S.
financial markets, said the Senators.

Taxpayers need to know that the Treasury Department is making sure that the
interest rates they pay on everything from home loans to retirement investments
are not rigged, said Senator Grassley. Treasury must take swift action to
inform consumers, homeowners, students and other borrowers about potential impacts
of faulty interest rates, added Senator Kirk, a member of the Senate Banking
Committee. The financial system depends on this crucial information, he
posited, and Treasury should consider alternative solutions to boost confidence
in the marketplace.”

In the letter, the Senators noted that, in recent testimony before Congress, Secretary
Geithner said that when, as president of the Federal Reserve Bank of New York,
he became aware of concerns that the LIBOR rate was being rigged, he deferred
to the British central bankers to fix the problem. Despite those
concerns, continued the Senators, Mr. Geithner appears not to have taken action
to diminish use of this flawed index in U.S. financial markets; to the
contrary, Treasury’s use of LIBOR has increased.

Recently, a Task Force headed by Martin Wheatley, UK Financial Services
Authority Managing Director, recommended three specific regulatory reforms to
restore credibility to LIBOR. First, regulation of LIBOR by the FSA. Second,
the key persons in the LIBOR process should be approved by the FSA. Third,
amending the Financial Services and Markets Act to allow the FSA to prosecute
the manipulation of LIBOR.